Banking on the Base of the Pyramid
Mr. Omar Andaya, officers and directors of the Rural Bankers Association of the Philippines, rural bankers, friends and partners, good morning. It is a pleasure for me to join you in this celebration of your 52nd Charter Anniversary. I would like to take this opportunity to congratulate you for 52 years of meaningful service to our rural communities. Let us give all the rural bankers here a round of applause. In 1932, the phrase “bottom of the pyramid” was used by former United States President Franklin D. Roosevelt in a radio address to his country that was in the midst of the Great Depression. He said, “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power…(plans) that put their faith once more in the forgotten man at the bottom of the economic pyramid”. It is almost an ominous coincidence that 80 years hence, we are also in the midst, although hopefully at the tail end, of a global crisis; and you have chosen Banking on the Base of the Pyramid as your theme. It is apparent that President Roosevelt’s statement is as relevant for us today, as it was then. Indeed, it is in adequately and appropriately serving and strengthening this sector that we will be able to build a solid base for economic growth and development. Worldwide, there is an increasing focus on this sector. Those described to be at the bottom of the pyramid (living on less that USD 2/ day) number more than 2.5 billion people, approximately two-fifths of humanity. By its sheer number, attention to this sector is inevitable. Yet, more than the
Delivered by BSP Deputy Governor Nestor A. Espenilla, Jr. during the Rural Bankers Association of the Philippines 52 nd Charter Anniversary on 09 October 2009 at the Sofitel Philippine Plaza, Manila.
number, it is really the social repercussions that should give us pause. With increasing global wealth, why are so many left out? Others, on the other hand, have seen the business side of serving the needs of those at bottom of the pyramid. In 2004, C.K. Prahalad’s book “Fortune at the Bottom of the Pyramid” presented unique insights in how companies can enhance their bottom lines by designing and serving the consumer needs of the poor. It challenged many traditional business models yet was very sound in its core assumptions. In the Philippines, we have seen this undertaken quite successfully. One common example is the proliferation of sachets that we can find in all groceries and sari-sari stores, be it for shampoo, cigarettes, soap, spices, and other basic goods. While priced higher than if sold in larger amounts, these sachets address the current requirements as well as the cash flow of a certain market. It is an effective answer to a particular demand, at the right price. It is the convergence of these two powerful perspectives, the social as well as the business angle, which is driving the Bangko Sentral’s initiatives toward financial inclusion. We believe that everyone should have access to financial services. This includes those that are traditionally left out by the formal financial system, those at the base of the pyramid. We also believe that if products and services are priced and designed appropriately, banks can profitably service this market in a sustainable manner. Our experience in microfinance has proven that we are on the right track. Ten years ago, low-income entrepreneurs with no collateral, financial records and credit histories were unlikely to be seen in bank offices. Today, banks have embraced them as valuable clients that have the capacity and character to repay their loans and to save. Latest figures show that the 221 banks involved in microfinance have outstanding loans of over PhP 6
Billion to nearly 900,000 microentrepreneurs. These microentrepreneurs have over PhP 1.7 Billion in savings. Worth mentioning is that majority of these microentrepreneurs are saving with a bank for the very first time in their lives. The microfinance programs of these banks have therefore not only provided a valuable service to clients but more importantly have unlocked a previously untapped rich source of funds that can again be used to provide more services to other clients. Our efforts have not gone unnoticed. Just a few weeks ago, the Economist Intelligence Unit, the business information arm of The Economist Group which continuously assesses and forecasts political, economic and business conditions in more than 200 countries, released their First Annual Global Microfinance Index and Study. The results of the study showcase the Philippines as a definite success in microfinance. Measuring the state of the regulatory framework, investment climate and institutional development, the Philippines ranked 3rd overall out of 55 countries, following the usual leaders such as Peru and Bolivia. Further, we ranked 1st overall in the area of regulatory framework. This is indeed a significant recognition that we should all be proud of. We have all contributed to this positive assessment of our microfinance industry. Let us give a round of applause for all the microfinance stakeholders in the country. This recognition should be viewed as an affirmation that we are doing things right. More than that, however, it should be viewed as motivation for all of us to work on the areas in which we can still improve as well as to move us to push the frontier even further. Toward this end, we are continuously working toward the strengthening of the banking system so that we have stronger banks that have the capacity to expand their branching and operating network. Along this line, the Monetary Board very recently approved the proposal to allow the loan collection and disbursement points or other banking offices of
microfinance oriented banks and branches not only to accept deposits but also receive withdrawals of their microfinance clients, subject to prudential rules. At the same time, we are keenly watching the new developments and innovations in technology that can be utilized to expand delivery channels. We are also open to possible linkages and partnerships with new players such as retail stores and other types of financial institutions to further widen access points to financial services. We believe that this multi-player/ multi-channel system, if designed properly, will result in healthy competition among players, lower costs, greater efficiency, and ultimately greater access to financial services. The recent issuance of the E-money Circular (Circular 649) is a significant step toward this direction. This Circular provides the basic regulatory framework for the fast-growing electronic money business, facilitates beneficial innovations in fund transfer mechanisms, and paves the way for healthy competition. Since its issuance, we continue to fine tune its implementation. We are also currently assessing the rich developmental possibilities of well regulated third party agent networks. Consider how a vast network of retail agents, in close partnership with banks, can dramatically scale up delivery of financial services to those previously untouched by the banking system. Rural banks can surely play a significant, if not central role, in this very exciting development. Aside from these initiatives, the Bangko Sentral also remains responsive to the many emerging issues and development in the industry. We believe the effective policy and regulations can only stem from fully understanding the current needs of the industry as well as its surrounding issues.
One area that we are focusing on, which is also crucial for those at the base of the pyramid, is the urgent need to focus on consumer protection. While commercialization has brought about competition in the microfinance industry, this competition has also sometimes resulted in practices that do not uphold the interest of the consumer; such as inappropriate sales techniques, incomplete information on the product or service being provided or non-transparency of fees and charges. The Bangko Sentral takes this issue very seriously and believes that it can be addressed in two ways. First, by establishing the necessary framework for consumer protection. Second, by augmenting these measures with a clear and sustained financial literacy effort. We are currently reviewing our rules and regulations on the disclosure of information specifically on interest rates, fees and charges to ascertain that the client is well informed of the actual price of the product or service. We believe that information is the necessary first step in ensuring that the clients have the adequate knowledge of their transaction. To further support this, we have strengthened our Financial Consumer Affairs Group or FCAG within the Supervision and Examination Sector where there is a clear safety net system of redress when clients have unattended complaints about services of financial institutions under the supervision of the BSP. We have also been conducting financial literacy seminars for all banks with microfinance operations. To date, we have reached 89 rural banks all over the country. Another area that I know is of interest to many of you is our policy approach to microinsurance. We have long since recognized microfinance as the provision of a range of financial services. Through the years the industry has continuously developed a range of appropriate products for the microfinance
market such as housing microfinance and micro-agri. At present, interest in microinsurance has been increasing. Considering the legal environment and our enabling laws, the BSP has been carefully studying how simple insurance products by reputable insurance companies can be offered by rural banks and other community based banks to their microfinance clients. We believe that this is an important piece in ensuring the sustainability of the structurally vulnerable microfinance clients. We believe we have now found a formula for doing this; and we will soon be presenting our proposals to the Monetary Board. Finally, another development worth noting is the emergence of banks with related microfinance NGOs. While this arrangement has worked well for some institutions wherein the NGO provides a certain degree of preparation for microfinance clients until they are ready to be bank clients, it is important to carefully look at the arrangements between the bank and its related NGO. It is necessary to ascertain that the dealings between the two institutions are clearly defined, transparent and within the boundaries of a fair business relationship. The governance arrangements for such partnerships should be sound. The BSP has taken a look at all such existing arrangements today. We are now studying possible guidelines to ensure that these relations are not abused. While these are only some of the important trends and emerging issues that have an impact on how we serve this base of the pyramid market, there are also some constant issues that we need to always keep in mind. Primary of which is the need to continuously and constantly commit to maintaining institutional strength and stability. In this regard, we welcome the idea of rural banks seeking institutional ratings from reputable rating agencies. We will soon be announcing the
framework for recognizing such ratings which eventually can also be possible basis for regulatory incentives in the future. On the part of the BSP, we will continue to work assiduously on our rules, regulations and enforcement so that banks maintain strong capital positions to allow some leverage to expand activities and operations while ensuring that there is sufficient protection should risks taken turn into losses. We will also make sure that better risk management systems are in place. It is important that the risk management approach is a proactive one, rather than reactive or just merely pitched to minimum compliance. We recently issued an exposure draft of proposed regulations to upgrade the risk based capital adequacy framework for rural banks. After considering your comments, we hope to promulgate this by year-end and have it take effect in 2011, to give you ample time to make the necessary adjustments. We also untiringly emphasize the need for good governance and sound management. Basic tenets of accountability, transparency, high standards of business ethics and compliance with regulatory and performance standards should be an indispensable part of all banking institutions. After all, the success of your banks will, to a large measure, dictate the success of your clients. Key initiatives in this area include the strengthening of the compliance function, the effective enforcement of rules against unsafe and unsound banking practices as well as the implementation of prompt corrective action. I am confident that the rural banks have recognized the importance of institutional strength and stability. You have shown your commitment to upgrade and strengthen your institutions. You have also demonstrated your resiliency in difficult times.
More recently, we have all been witnesses to the impact of Ondoy and Pepeng. We realize that this has potentially significant consequences for banks and their customers, especially those at the bottom of the pyramid. The Bangko Sentral has quickly responded by offering a package of regulatory and rediscounting relief measures to help banks cope with the problems; as well as to encourage them to, in turn, provide relief to their own customers to help them get back on their feet sooner. We have done this before in response to the ravages of typhoons Milenyo, Reming, Frank and Cosme. We hope that our joint efforts will hasten the rebuilding of the damages the typhoons have brought, especially to the vulnerable Filipinos at the bottom of the pyramid. Your admirable commitment to serving the base of the pyramid, will ensure that we are well on our way on building the perfect foundation for our sustained growth and prosperity. Rest assured, that the BSP will be your constant partner in this noble task. Maraming salamat po.